Franchise
Services are brought under the Service Tax net by the Finance Act, 2003, w.e.f.
1-7-2003 vide Notification No. 7/2003, dated 20-6-2003.
The services shall be taxed, if provided by a franchisor.
Rate of Service Tax: The rate of
service tax is specified in section 66 of the Act. The Finance (No. 2) Act,
2004 has substituted the charging section 66, and the rate of service tax is
enhanced from 8% to 10% ad valorem. The increase in tax rate has come into
force from the date of enactment of the Finance (No. 2) Act, 2004 i.e. 10-9-2004.
Further, the Finance (No. 2) Act, 2004, w.e.f. 10-9-2004 has also
levied an education cess @ 2 % of the service tax. The cess paid on inputs
services shall be available as credit for payment of cess on output services.
For further discussion in this regard, refer to -'Payment of Service
Tax'.
The
definition of franchise has been given under clause (47) of section 65. That
is:
'franchise"
means an agreement by which -
(i) franchisee is granted
representational right to sell or manufacture goods or to provide service or
undertake any process identified with franchisor, whether or not a trade mark,
service mark, trade name or logo or any such symbol, as the case may be, is
involved;
(ii) the franchisor provides
concepts of business operation to franchisee, including know-how, method
of operation, managerial expertise, marketing technique or training and
standards of quality control except passing on the ownership of all know-how
to franchisee;
(iii) the franchisee is required to pay to the
franchisor, directly or indirectly, a fee, and
(iv) the franchisee is under
an obligation not to engage in selling or providing similar goods or services
or process, identified with any other person".
The
expression 'franchise' has been defined specifically. A franchise agreement
also includes the franchisee being obliged to follow the concept of business
operation, managerial expertise, market techniques etc. of the franchisor and
is under an obligation not to engage in selling, producing or providing similar
goods or services, identified with any other person. Therefore, the agreement
which provides the terms and covenant as mentioned in the definition will be
covered within the ambit of service tax.
(1) Taxability all the four conditions mentioned in clause (47) of Section 65 must be present in the franchisee agreement
Yes,
aforesaid point was raised before the Government, in the Circular No.
59/8/2003, dated 20-6-2003 (appended as Annexure 1), "For
removal o doubt it is clarified that unless all the ingredients mentioned at
(i) to (iv) of the said sub-section (47) are satisfied, the agreement can
not be called as franchise agreement".
The
definition of taxable service provided by a commissioning or installation
agency has been given under sub-clause (zze) of clause (105) of section
65. That is:
any
service provided "to a franchisee, by the franchisor in relation to
franchise".
(1) Agreement to allow use of product name etc.
is taxable service
No, a
point was raised before the Government, where 'franchisor' only agrees to give
authority to 'franchisee' to use his name (i.e. product or service or trade
name) and not provide any other facilities such as know-how, managerial expertise
etc. - whether such agreement is covered in this taxable service? The
Government in its Circular No. 59/8/2003, dated 20-6-2003 (appended
as Annexure 1) has clarified, "The mere fact that a principal manufacturer
has allowed production of goods bearing his brand name by another person under
'License Production Agreement', does not make the agreement a Franchise
Agreement... and accordingly the license fees paid for such license production
cannot be charged to service tax".
Service
tax is liable to be paid when franchise services are rendered by the
franchisor.
(1) 'Franchiser'
The
definition of 'franchisor' has been given under clause (48) of section 65. That
is:
"franchisor
means any person who enters into franchise with a franchisee and includes any
associate of franchisor or a person designated by franchisor to enter into
franchise on his behalf and term "franchisee" shall be construed
accordingly".
According
to definition of 'franchisor', he could be any person, therefore, it is not
necessary that 'franchisor' should be an establishment or commercial concern,
he could be an individual or any other person. The term 'person' has not been
defined in the context of service tax. But, the term 'person' has been defined as
"person shall include any company or association or body of individual,
whether incorporated or not" [clause (42) of section 3 of General Clauses
Act, 1897]. In the present context, franchisor can be individual or a well
organized sole proprietorship/ partnership firm or a public/private limited
company.
Further,
the 'franchisor' also includes any associate of the franchisor or a person who
has been authorised by the franchisor to enter into an agreement of franchise
on behalf of the franchisor.
Franchise
services are liable to be charged to service tax
Franchise
services are liable to be charged to service tax when provided to -
§
a franchisee
§
in relation to franchise
(1) Franchisee'
Services
are liable to be charged to tax only when it is provided to 'franchisee'. The
term 'franchisee' has not been specifically defined in the context of service
tax. But, the term 'franchisee' as per the dictionary meaning "one to whom
a franchise is granted" (reference the Chambers English Dictionary). Further
in clause (48) of section 65, the reference of 'franchisee' has been made and
mentioned that "the term 'franchisee' shall be construed
accordingly". Therefore, franchisee shall be a person with whom agreement
of 'franchise' is made by the 'franchisor' or by any other person on his
behalf.
Value
of taxable services for charging tax
The value
of taxable services in relation to services provided by the franchisor shall be
the gross amount charged by the franchisor from a franchisee for services
rendered in relation to franchise [section 67]. The words 'gross amount' is
used in contrast to the 'net amount', therefore, no abatement shall be allowed
in respect of administrative/ office expenses incurred in respect of such
services.
Explanation
1 has also been added to section 67, which provides that, for the removal of
doubt, in respect of only certain specific services, it is declared that
certain amount shall be part of value of taxable services and certain amount
shall not be part of the value of taxable services, but nothing has been
specified in respect of franchise services.
(1) Value o taxable service where lumpsum payment is received prior to 1-7-2003 but the entire or part of service is provided on or after 1-7-2003
The
Government in its Circular No. 65/14/2003, dated 5th November, 2003 (discussed and appended as Annexure VII in the -
'Payment of Service Tax') has clarified that "where the value of taxable
service has been received in advance for a service which became taxable
subsequently, service tax has to be paid on the value of service attributable
to the relevant month1quarter which may be worked out on pro rata basis".
Accordingly on the services rendered on or after 1-7-2003 for which
the lumpsum payment has been received prior to 1-7-2003 (i.e. prior
to the date of imposition of levy on taxable service), the value of taxable
service shall be worked out on pro rata basis.
The Government has granted exemption from the whole of Service Tax in respect of all taxable services, for services provided to United Nations or an International Organisation. Similarly, the exemption, subject to certain conditions, has also been granted for taxable service provided to a developer or units of Special Economic Zone (SEZ). The Government, w.e.f. 20 November, 2003 has restored the exemption, as an interim measure, from the whole of service tax when payment is received in convertible foreign exchange for the taxable services rendered in India provided it was not repatriated from or sent outside India, such exemption was earlier withdrawn w.e.f. 1-3-2003. The reader may note that detailed discussion about aforesaid exemptions along with relevant notifications have been given in the 'Exemption from whole of Service Tax - Some Cases'.
N.B. The readers may note that
provisions, procedures and other related discussion related to registration,
payments of service tax, filing of return, interest and penalty, assessment
procedure, appeal, refund of tax, etc., which are same, as applicable in
respect of other taxable services, have been given in separate.
Clarification on the scope of the term
for levy of service tax
[Circular
No. 59/8/2003 [F. No. B3/7/2003-TRU], dated 20-6-2003,
relevant extracts]
2.4 Franchise Service
Franchise
service is a service provided by franchisor to a franchisee. Section 65 of the
Finance Act, 1994, (sub-section 47) defines franchise as a specific type
of agreement. This agreement has various ingredients, which have been specified
in the said definition. For removal of doubt it is clarified that unless all
the ingredients mentioned at (i) to (iv) of the said sub section are satisfied,
the agreement can not be called as franchise agreement. These ingredients are,
(i) the franchisee is
granted representational right to sell or manufacture goods or to provide
service or undertake any process identified with franchisor, whether or not a
trade mark, service mark, trade name or logo or any such symbol, as the case
may be, is involved;
(ii) the franchisor provides concepts of business operation to franchisee, including know how, method of operation, managerial expertise, marketing techniques or training and standards of quality control except passing on the ownership of all know how to franchisee;
(iii) the franchisee is required to pay to the
franchisor, directly or indirectly, a fee; and
(iv) the franchisee is under
an obligation not to engage in selling or providing similar goods or services
or process, identified with any other person.
For
example, the mere fact that a principal manufacturer has allowed production of
goods bearing his brand name by another person under 'License Production
Agreement', does not make the agreement a Franchise Agreement. A franchise
agreement also includes the franchisee being obliged to follow the concept of
business operation, managerial expertise, market techniques etc. of the
franchisor and is under an obligation not to engage in selling, producing or
providing similar goods or services, identified with any other person. Therefore,
in the absence of such ingredients, a mere licensed production cannot be called
as a franchise agreement and accordingly the license fees paid for such license
production cannot be charged to service tax.